Core Processing Quandary: In-House or Service Bureau?
When a credit union approaches the all-important task of determining whether to reach out to a service bureau or assume all related responsibilities to maintain an in-house data processing system, a number of quandaries immediately arise.
The first issue centers on the asset class, size and geographic location of the credit union. For many small-to-medium organizations, the ability to effectively oversee an information technology operation is not feasible and therefore relying on a third party is essential to success. And for larger credit unions, with a dedicated IT department, it may be prudent to handle all operations in-house, which provides more flexibility when selecting hardware, software and third party solutions, as well as dealing with contract negotiation of services.
The Business Performance Innovation (BPI) Network, in association with Paladin fc, released a report in May 2013 titled, “How Core Vendor Contracts Impact Bank and Credit Union Value.” The report found that 90% of respondents added to their core bank processing and related IT services in the past three years. Seventy-four percent expect to make additions in the next three years.
In-House vs. Service Bureau
The decision whether to go in-house or select a service bureau is closely tied to the complexity and asset size of the credit union. There are inherent benefits to opting for a service bureau as these credit unions have a “dedicated box” of IT services. This approach simplifies the IT management process and provides a sense of security and relief, especially with issues of compliance, security and disaster recovery, among other action items.
A credit union that has placed its confidence in a service bureau must believe that all related IT contracts are being actively negotiated in this time frame. This, however, is a faith-based approach as they are not privy to the contract negotiations between its service bureau and the third-party vendors providing services.
For a larger credit union with an IT department, the same concern arises. It is one thing to have the technological know-how to manage vendor projects, especially as they relate to core system operations, but understanding the varied contracts timeframes and stipulations is another challenge.
Therefore, it is critical to understand that contract negotiations should include a “long-term view” approach. The BPI Network report found that credit unions with $500 million to $1 billion in assets “appear” to have the greatest opportunity to reduce costs, with an average savings of 29.1%, or approximately $1 million over a five-year contract.
Next Page: Reality Checklist
Perception vs. Reality: Checklist to Selecting
1. Independence. Perhaps the leading reason a credit union selects in-house is the perception that it will be able to operate independently. The reality is that the credit union is limited by the flexibility and capability of the system. For example, how easily can the IT department create interfaces or customize and manipulate data?
2. Lower Costs. While the perception is true that a credit union operating an in-house system will pay less annually, the reality is that the organization is taking on more responsibility. Therefore, senior executives have to employ a 10-year view and determine the “all-in” costs, which include hardware, software and manpower.
3. Service Quality. The perception is that by selecting vendors for specific solutions rather than an umbrella service system, the level of service per contract will be elevated. The reality is that since the Great Recession, there has been a change in vendor attitude, which has adversely impacted service and is not in line with the cooperative spirit of credit unions.
1. No Independence. While the perception is that all services are operating under one system and one point of contact, the reality is that many of these services are outsourced from the hosted core provider. As a result, credit unions lose interoperability with key third-party interfaces. Senior executives must determine the “all-in” cost per member over a 10-year period. At a certain point, there will be a financial inflection point where switching to in-house is cost effective.
2. Assets. The perception is that credit unions selecting a service bureau are operating at a lower asset class and without an IT department. The reality is that in many cases this theory holds true; however, the following characteristics must be considered: geographic location (larger but rural credit unions are at a disadvantage), infrastructure, culture and financials.
3. Aging Technology. The perception is that service bureau core systems include cutting edge technologies; the reality is that the ratio of old, proven technology companies to new technologies is increasing. As such, there is more concentration on service bureaus “patching” together older legacy systems than developing cohesive, up-to-date solutions that look past the present and determine future technology needs.
As more vendor consolidation is realized, credit unions must understand that it is not merely a question of selecting a service bureau or an in-house core data processing platform based simply on cost. Credit unions should never generalize services over cost. This is dangerous and often detrimental to the overall well-being of the credit union construct.